SIFMA, ICI and DTCC eye transition to T+1 settlement

Three finance industry organizations are co-operating to examine shortening the trading settlement cycle from two days to one in order to reduce operational risk and trading costs.

The Securities and Financial Markets Association (SIFMA), Investment Company Institute (ICI) and Depository Trust and Clearing Corporation (DTCC) will finish a review of the transition by the end of Q3, and the groups are expected to release their findings a few weeks after completion.

SIFMA, ICI and DTCC worked together in 2017 to co-ordinate a shift in the securities settlement cycle from three days to two, and recent volatility has many in the industry convinced that it is more important than ever to shorten the settlement cycle to a single day, according to Murray Pozmanter, head of clearing agency services and global business operations at DTCC.

‘The onset of the pandemic last March increased volatility, and the recent episode with meme stocks shows there is additional volatility in the market that could continue for quite some time,’ Pozmanter says. According to him, one of the main drivers behind shortening the settlement cycle is the volume and volatility that have occurred in the markets, which have driven sharp increases in margin requirements.

‘Time between trade and settlements equals risk,’ Pozmanter notes. ‘The longer the period of time you are holding margin, the higher the charge is going to be. T+1 takes a full day of risk out of the settlement process.’

He says DTCC’s estimates show that if the settlement cycle moves from T+2 to T+1, it would reduce costs associated with volatility component of margin requirements by 40 percent.  

Tom Price, managing director of operations, technology, cyber and business continuity at SIFMA, says his organization estimates the industry will save $3 bn per year in clearance or margin requirements. ‘There is a whole ability to create better risk management in the system and to create efficiencies,’ he says. ‘By making settlement shorter, we reduce risk and we reduce the capital required to do financial transactions.’

In times of high volatility – which can be a real drain on the financial industry – a shorter settlement cycle means firms won’t have to use so much capital, Price adds.

The group is running a cost-benefit analysis to determine the cost to the industry to shorten the settlement cycle, and Pozmanter notes that cost would depend upon the functions of each party and its ability to be flexible.

He says what will determine cost are the agreed-upon conventions for two matters: the issue of how securities lending will be handled and the changes that will be needed in the institutional trade flow to accommodate the modified settlement cycle. Pozmanter says these matters will be evaluated over the next four months, adding that the groups will examine any issues that could complicate the transition.

‘When you’re setting out on anything that is an industry-wide initiative, the biggest obstacle is always getting consensus to move forward with the effort,’ he says. ‘Getting the dealers, buy side and custodians to agree to the move is a major component. The sec[urities] lending process, post-trade processes and possible cross-border issues could be concerns, but we will be examining these areas closely and finding solutions and timeframes for implementation over the next few months. At this juncture, we don’t see anything that will hold this up from moving forward.’

Price agrees that the next few months represent crucial progress toward shortening the settlement cycle and lessening risk. ‘We want to focus on how to create the most effective and modern settlement system in the US,’ he says. ‘This is a complex and complicated issue, and we need to be disciplined and approach it in a way that doesn’t create more risk to the system. It is a continuing evolution.’